Work the Web for That Elusive Angel Investor by Juan Hovey, L. A. Times 1 12 2000

Do you daydream about finding an angel investor for your start-up? If so, plug yourself into the electronic age, because the Internet can make your daydreams real.

The first angels were wealthy individuals who financed Broadway productions in New York a century ago. These days angels finance many a start-up and early-stage business, including many high-tech enterprises, and they differ from venture capitalists in important ways.

For one thing, they invest as little as $50,000 or $100,000 in a given company--more when they band together--and they often mentor the entrepreneur, providing advice on strategy and business structure, among other things.

For another, angels keep a low profile; you don't find angels listed in the phone book. Instead, most fly solo or operate in small groups, and they rely on contacts among attorneys, accountants, investment bankers, and business consultants to screen candidate businesses.

Venture capitalists, by way of contrast, pool their money in large funds investing a minimum of $5 million, often much more, in a given company. These funds employ professional managers to find promising ventures, and although the funds often take seats on a company's board of directors, venture capitalists want to make money fast, not hold your hand.

Venture capitalists also want quick exit strategies, so they prefer later-stage enterprises on a clear path to a stock offering or sale within a few years, sometimes within a few months.

As outlined in this space in recent weeks, you can find venture capital firms on the Internet by the dozen, although it takes some digging to identify firms that might have an interest in an enterprise like yours.

You can also use the Internet to get your business plan in front of an angel through these Web-based matchmaking services, among others cropping up almost monthly: * ACE-net, the U.S. Small Business Administration's Access to Capital Electronic Network, accessible through the SBA's Web page (http://www.sba.gov) and through the Web page of the University of New Hampshire (http://www.ace-net.sr.unh.edu/pub), one of several U.S. universities co-sponsoring the effort. * Rule506.com (http://www.rule506.com), operated by a Houston-based partnership. * Garage.com (http://www.garage.com), founded by Apple alumnus Guy Kawasaki. * OffRoad.com (http://www.offroad.com), founded by Stephen Pelletier, a refugee from Intuit.

Alone among these sites, ACE-net does not screen entrepreneurs seeking angel financing. Instead, ACE-net allows anybody with $450 to post a business plan on the Web in the hope that it will attract the attention of an angel investor or venture capitalist.

As you might expect, the accessibility of ACE-net attracts a lot of wannabe entrepreneurs. It also limits ACE-net's appeal to angels or venture capitalists , who get more potential deals through normal channels--that is, through their contacts among attorneys, accountants, investment bankers, business consultants, and others--than they can easily plow through.

In plain English, because it's the rare angel who puts in the time to weed out the wannabes on ACE-net, don't for a moment imagine that simply posting information on the ACE-net site will get you in front of an angel, much less one with a checkbook in hand.

Instead, make the most of ACE-net's real value: For $450, ACE-net gets information about your business into its database and may also put you in touch with nonprofit mentors who, by helping you to hone your business plan, may make you a serious candidate, whether through ACE-net itself or through some other medium.

Unlike ACE-net, Rule506.com--named after the U.S. Securities and Exchange Commission regulation governing most private placements--is a matchmaking service that screens start-up companies seeking seed money from a network of financing sources including angels, venture capitalists, insurers, and even banks.

An advisory committee vets all offerings sent to Rule506.com and, rejecting all but a handful, sends summaries of promising candidates to financing sources likely to have an interest in a particular project.

Rule506.com does not serve as an investment banker but instead leaves it to

the entrepreneur to negotiate a deal with the financing source. It charges entrepreneurs a fee pegged to the offering and generally reflecting fees charged by investment bankers, which can run to 9%, sometimes more.

Rule506.com can also put the entrepreneur in touch with what it calls "business angels"--experienced individuals who can hand-hold the entrepreneur and perhaps even take an active role in management, with or without also investing in the venture.

Garage.com also targets start-ups seeking seed capital, and it, too, vets all applicants carefully. Also like Rule506.com, Garage.com charges a success fee payable upon funding and pegged to the size of the deal. It can also help the entrepreneur in developing a business model, plotting financing strategy, and devising an organizational structure.

Given its location in the Bay Area, not to mention the contacts of Kawasaki, Garage.com attracts a number of Silicon Valley entrepreneurs and has a good record in fostering start-ups.

OffRoad.com, also headquartered in the Bay Area, targets high-growth, later-stage companies seeking expansion capital from $3 million to $15 million from angel investors or private equity groups. Essentially an online investment banker, OffRoad.com doesn't provide matchmaking services but rather actually arranges financing deals.

It takes a percentage of any deal it puts together--commonly 3% to 9% plus warrants. As an investment banker it also advises entrepreneurs in structuring private-placement transactions. Next week: How to use the Web to sell stock in your company. Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.